* Rules need to be harmonised
* Power prices seen rising in coming years
* Spot exchanges needed
By Michael Kahn and Henning Gloystein
PRAGUE/LONDON, Oct 6 (Reuters) - Cross border power trade will not thrive in Central and Southeastern Europe until governments and regulators harmonise market rules and clear away hurdles such as import and export fees.
Legal obstacles, underinvestment in the energy infrastructure, a lack of spot exchanges and too much state-owned generation also limit development of electricity trade across borders, especially in southeast Europe.
"Right now the markets are so illiquid and so special you have very little trading," said Claus Urbanke, head of new markets at Statkraft. "But for the trading you do have there are large risk premiums."
Cross border power trading is needed for efficient markets because it enables traders to arbitrage between cheap and expensive regions, allowing power to flow freely according to supply and demand.
In Western Europe this happens, especially from Northern and Western Europe down to Italy, and the market is keen to fully develop similar possibilities in Central and Southeastern Europe, which offers big potential growth and numerous borders.
But governments have made little progress harmonising market rules. The result is around a dozen countries each have their own rules for importing and exporting electricity.
"Unfortunately, not much progress has been achieved lately in Southeastern Europe, and rules are still not harmonized, hampering trading," said Michal Skalka, deputy head of trading at Czech utility CEZ .
SPOT EXCHANGES NEEDED
Traders say that while Germany, the Czech Republic, Poland, Slovakia, Austria, and Hungary are well connected through transparent and coordinated auctions on a yearly, monthly and daily basis, there are practically no daily auctions in the region between Hungary and Greece.
In the physical electricity markets, capacity volumes are predicted on a short-term basis so it is important to have easy access to day-ahead and hourly capacity through power exchanges.
In Southeastern Europe only Romania has such an exchange which can, in theory, handle such transactions. But traders complain that complex rules make it virtually impossible for foreign market players to join.
As a result it can be difficult for traders to adequately cover themselves with capacity according to supply and demand.
"If you buy too little, you do not have enough notice to react, and this negatively impacts the liquidity of these markets," Statkraft's Urbanke said.
Export and import fees also block more interconnectivity, traders say.
Many transmission system operators, such as those in Romania, Bulgaria and Greece, charge any cross border power transaction, effectively levying a custom fee for electricity.
Such charges are often used by governments looking to protect a national utility that dominates its power market and that can take advantage of profitably importing from one border cheaply and then sell out of another border more expensively.
Almost all capacity in the region belongs to state-owned generation and traders said that many of these utilities hedge themselves by buying and selling border capacity tenders.
"They are playing the trading game that the entire market would like to play, but by not letting us in, prices stay high and the national utility effectively prints its own money," a German arbitrage trader said.
While traders said that similar problems also still exist in Western Europe, the issues are more acute heading southeast.
Yet despite these obstacles, the region offers plenty of opportunities for power trading as a whole, and cross border arbitrage deals in particular.
"The price trend is clearly up over the coming years and this makes it an attractive region," Statkraft's Urbanke said. "The question is just when."
Other traders said governments in the region should merge, or couple, their markets as Western European countries have done during the past decade.
The Nordic Markets of Denmark, Finland, Norway and Sweden as well as France and the BeNeLux are already integrated, and Germany is in the process of coupling with both the Nordic and the France/BeNeLux regions.
"One day fairly soon you will be able to trade power profitably from the Baltic Sea right down to Italy and around the Eastern tip of the Alps, and that is the time when the first market movers stand to gain," the German-based trader added.